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Profitability and Startups: Why You Don’t Need To Be Profitable To Exit

Profitability and exits seemingly don’t go hand in hand. We look at the companies who have proven you don’t need to be profitable to go public and why exactly you don’t need a positive cash flow to exit. 


I cringe writing that title because we’re sticklers for cash efficiency and achieving cash break even. However, we looked at tech 94 companies at IPO and determined 72 of them were not profitable (77%) and 60 were not generating positive cash flow (64%). The data and additional observations are below.

Profitability in Tech Companies

 

Profitability and Exits Depend on the Sector

E-Commerce, Hardware, and Gaming Did Generate a Profit

On median at the time of IPO, e-commerce generated operating profits of $4.1mm, gaming generated $10.6mm, and hardware generated $82.5mm. It makes sense that these sectors would have to generate a profit to go public because their customer may not recur the same way a software company customer does. Therefore every sale must be profitable whereas, in SaaS where you may keep the customer indefinitely, it’s ok to generate a profit on the customer in 2 to 3 years.

SaaS and Content Distributors Are Especially Unprofitable

Only 9 of the 52 SaaS companies shown were profitable at IPO. However, 18 of them did generate positive free cash flow. On median, these companies were burning -$19mm per year at IPO. None of the 6 content distributors shown were profitable at IPO and only Spotify generated free cash flow.

Marketplaces & Social Media Were Mixed

Half the social media companies at the time of the exit were profitable while 4 of 10 marketplaces were profitable.

Companies That Are Unprofitable Have 14 Months of Runway

On median, those companies that are not generating a profit have 1.3 years of cash on hand across the entire data set. They filed for IPO with plenty of time to complete the transaction.

In conclusion, while you don’t need profitability to exit/IPO, you do need to give yourself time to complete the transaction so make sure you have plenty of cash (at least 12 months). In our view, the same rule applies when you’re raising money. Make sure you go into a capital raise with no less than 6 months of runway and hopefully much more.


Sammy is a co-founder of Blossom Street Ventures. They invest in companies with run rate revenue of $2mm+ and year over year growth of 50%+. We can commit in 3 weeks and our check is $1mm. Email Sammy directly at sammy@blossomstreetventures.com.